The author wishes to thank the members of the Centre for Tax Law at the Stockholm School of Economics for their very valuable comments on an earlier draft of this article. Any error however remains in the entire responsibility of the author.

Jérôme Monsenego can be contacted at jerome.monsenego@hhs.se

1 Introduction

Sweden is a country where transfer pricing boomed relatively recently, although an adjustment provision was already enacted back in 19281. Documentation requirements have been in force since 1 January 20072, and next thing about transfer pricing on the agenda of the Ministry of Finance is considering launching an Advance Pricing Agreement3 (APA) programme4. Such initiative might be encouraged regarding the advantages provided by APAs, which the European Commission acknowledged in a Communication to the Council5. No such rules exist in Sweden and since transfer pricing is a field where comparative surveys can be useful6, the Ministry of Finance asked the Swedish Tax Agency to look at practice in other countries. This article presents the French APA programme and some of its particularities. This could be of interest in the short-term with respect to designing a Swedish APA programme, and in the mid-term for Swedish companies willing to conclude an APA with France.

Municipal Tax Act (Kommunalskattelagen) 1928:370, 43 §. Now the provisions are found in the Income Tax Act (Inkomstskattelagen), chapter 14, 19 § and 20 §. See Bertil Wiman, Prissättning inom multinationella koncerner, Iustus Förlag, Uppsala, 1987, p. 75; Richard Arvidsson, Dolda vinstöverföringar, Jurisförlaget, Stockholm, 1990, p. 92.

Self declaration and control Act (Lag om självdeklarationer och kontrolluppgifter) 2001:1227, chapter 19, 2a§ and 2b§. Administrative guidelines, SKVFS 2007:1, 14 February 2007. These guidelines detail what is expected from the taxpayer, provide for simplified documentation requirements for transactions with less value, and deem documentation prepared according to the EUTPD approach fulfilling Swedish requirements.

Chapter 4 of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the OECD (called hereafter the OECD Guidelines), 4.124 §, defines an APA as ”an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time”.

Letter of mission for the budget of year 2007 concerning the Swedish Tax Agency and the Swedish Enforcement Authority (Regleringsbrev för budgetåret 2007 avseende Skatteverket och Kronofogdemyndigheten), 12 December 2006, Fi2006/4366 and Fi2006/6999 (partly), 4 §, p. 8.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007.

For example, the French Ministry of Finance ordered a report including a comparative approach in order to modernise French tax law which concerned transfer pricing to a great extent. The report referred mostly to the U.S. and U.K. rules, but also to a larger panel of OECD countries. See Bruno Gibert, Améliorer la sécurité du droit fiscal pour renforcer l’attractivité du territoire, letter of mission, p. 84: ”Le cas échéant, votre travail s’appuiera sur l’examen d’exemples étrangers”. This can be translated in English as follows: ”If the need arises, your work will rely on study of foreign examples”. Several outcomes of this report were followed by the lawmaker: unilateral APAs, simplified APA procedure for SMEs, suspension of the collection of taxes when a competent authority procedure is undertaken by the taxpayer to eliminate double taxation, request of a ruling from the French tax authorities stating whether or not a business activity in France constitutes a permanent establishment. For advantages of using comparative tax law approach, see Victor Thuronyi, Comparative Tax Law, Kluwer Law International, 2003.

2 APAs as tools to secure the transfer pricing environment

Since the beginning of the 1990’s, tax authorities’ focus towards transfer pricing has considerably increased in most developed countries. For example, in France, it is estimated that transfer pricing reassessments7 went up from EUR 200 million in 1995 to EUR 1 billion in 20058: the risk borne by multinational companies has become much higher and can be expected to keep on growing parallel to globalisation.

Providing for a secure transfer pricing environment is therefore of prime importance. It is also beneficial for both companies and states. For a company, it is an incentive to invest abroad, limits the incitement of tax avoidance, and mitigates long and expensive disputes. For a state, a secure transfer pricing environment secures the tax base and makes it attractive for foreign investments.

Several tools are typically used by lawmakers to secure transfer pricing. APAs are one of those. Legal security stems from the fact that a taxpayer benefits from an agreement between its domestic tax authorities and one or more foreign tax authorities on the transfer pricing method. Parties are bound over a certain period of time. Hence, APAs can avoid double taxation as well as audits and court proceedings that may not be adapted to the factual nature of transfer pricing9 – provided there is no dispute on application of the agreement.

APA programmes exist in many OECD members, and even in non OECD members like Russia, Brazil or Argentina. This shows that countries assess APAs as good solutions to prevent transfer pricing issues and double taxation. APAs have both advantages and drawbacks10, but taken as a whole the former seem to overweigh the latter. While the OECD remained prudent with advising to launch systematic APA programmes11 – because they were rather new solutions to transfer pricing issues in 1995 – twelve years later the European Union Joint Transfer Pricing Forum (JTPF) considered that ”the over-all aim of the Forum’s work on APAs is to encourage the use of APAs where they are appropriate tools for dispute avoidance12”. The Forum however stressed the importance of making more similar the procedures of Member States because businesses complain about disparities in APA rules13. This is why it suggested looking for convergence in APA rules. The Forum’s suggestions were followed by a Communication of the Commission to the Council which clearly took position for APAs as tool to prevent transfer pricing disputes and avoid double taxation: ”APAs are an exemplary method of dispute avoidance14”, and ”the Commission fully supports the conclusions and suggestions of the JTPF on APA15 s”. In the annex16, the Commission wrote Guidelines that tend to harmonize APA procedures throughout Europe as the Forum advised. The Commission stated that ”these guidelines constitute a worthwhile blueprint for APA processes across the EU17”. The Commission ”invites the Council to endorse the proposed Guidelines on APAs in the EU and invites Member States to implement quickly the recommendations included in the Guidelines in their national legislation or administrative rules18”. The Council adopted the Guidelines on 5 June 2007. This is meant to result ultimately in an APA procedure similar in all Member States19.

Apart from reassessment on the tax base and associated interests for late payment, transfer pricing reassessments can give rise to withholding taxes on profit distribution as well as penalties for tax avoidance. Transfer pricing reassessments can also lead to VAT and custom tax audits (or conversely), because all these types of taxes are related to flows within a multinational enterprise.

See Bruno Gibert, Statement of practice on cross-border dispute resolution – France significantly improves tax security for international transactions, European Taxation, August 2006, p. 356.

See Bruno Gibert, Developments regarding the French ruling procedures, European Taxation, March 2006, p. 102.

For example, according to the OECD Guidelines the main assets of APAs are to ”provide the taxpayers involved with certainty”, help ”consult and cooperate in a non-adversarial spirit”, ”prevent costly and time-consuming examinations”, and ”reduce or eliminate the possibility of juridical or economic double taxation” (OECD Guidelines, 4.143 §, 4.144 §, 4.145 §, and 4.146 §). On the other hand, the OECD Guidelines point out that an APA concluded between a multinational company and one or more tax authorities raises a problem regarding other tax authorities and related parties not involved in the APA (OECD Guidelines, 4.148 § and following). For the position of the EU JTPF, see Commission staff working document, Report prepared by the EU Joint Transfer Pricing Forum, 26 February 2007, SEC(2007) 246, pp. 7-9.

OECD Guidelines, 4.161 §: ”while it is too early to make a final recommendation whether the expansion of such programmes should be encouraged, it seems likely that in certain circumstances they will aid in resolving transfer pricing disputes”.

Commission staff working document, Report prepared by the EU Joint Transfer Pricing Forum, 26 February 2007, SEC(2007) 246, 38 §, p. 9.

Commission staff working document, Report prepared by the EU Joint Transfer Pricing Forum, 26 February 2007, SEC(2007) 246, 16 §, p. 6: ”businesses argue that the different sets of rules governing the various APA procedures in Member States are time consuming and burdensome for businesses. Because bilateral and multilateral APAs require two or more tax administrations to agree on a transfer pricing methodology, it is much easier if the various jurisdictions use a similar approach”.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007, 13 §, p. 7. See 5 §, p. 3: ”The Commission considers that APAs Guidelines are an efficient tool for dispute avoidance with valuable advantages for tax administrations and taxpayers. APAs will provide in advance certainty concerning the transfer pricing methodology and therefore simplify or prevent costly and time-consuming tax examinations into the transactions included in the APA: this should lead to savings for all parties involved in the APA”. See also press release IP/07/236.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007, 36 §, p. 8.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007, annex, pp. 9-17.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007, 37 §, p. 8.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007, 38 §, p. 8.

Transfer Pricing Review 2006/07, Euromoney Yearbooks, p. 14.

3 APAs in Sweden

No APA programme exists in Sweden. Advance tax rulings are available from the Board of Advance Tax Rulings (Skatterättsnämnden), but this procedure concerns only legal matters. Transfer pricing is not subject to such rulings20.

In practice it is possible that tax authorities accept a unilateral APA concluded in another state provided the relevant tax treaty includes a Mutual Agreement Procedure (MAP) based on article 25 of the OECD Model: the unilateral APA turns into bilateral. Competent authorities may also conclude a bilateral APA without previous unilateral APA, if the relevant tax treaty includes a MAP. This is described in the OECD Guidelines and is explained by the fact that an APA is legally based on the MAP provided for in the relevant tax treaty. Although article 25 of the OECD Model does not explicitly consider APAs, the OECD Guidelines justify with two arguments the possibility to conclude an APA based on the a MAP: first, article 25-3 encourages states to resolve difficulties or doubts as to interpretation or application of the convention by way of mutual agreement, and paragraph 32 in fine of the Commentary accepts such agreement when it has arisen in connection to an individual case. Second, article 25-3 states that a MAP may be used to solve double taxation, which is precisely the objective of APAs. Consequently, the OECD Guidelines consider APAs are authorised by article 25-3 of the OECD Model21.

Yet if APAs are legally based on the MAP similar to article 25 of the OECD Model, they are practically handled by domestic tax administrations22. This means that an APA is possible without domestic legal framework, but such framework is desirable to organise the procedure and promote this tool as a means to secure transfer pricing.

Therefore, the Swedish Ministry of Finance decided to consider launching an APA programme. In a document dated 21 December 2006, it asked the Swedish Tax Agency to explore the ways to enact an APA programme: ”Skatteverket skall utreda möjligheterna att inrätta ett formaliserat förfarande för framställningar om bi- och multilaterala förhandsbesked på interprissättningsområdet (s.k. Advance Pricing Agreements). I uppdraget ingår att ta närmare del av erfarenheter på området inom OECD samt regelsystem i andra länder. Behovet av lagstiftning för att inrätta ett sådant förfarande i Sverige skall bedömas och förslag till sådan lagstiftning tas fram. För- och nackdelar med olika organisatoriska modeller bör behandlas liksom förväntade kostnader för de förslag som presenteras. Uppdraget skall redovisas senast den 31 december 200723”.

Unilateral APAs and simplified APAs for SMEs are not part of this assignment, nor are mentioned the Guidelines for APAs within the European Union. These Guidelines were indeed only in a draft form when the decision of the Ministry of Finance was taken. They are now adopted by the Council, and the Commission encourages Member States to implement them24. Nothing seems to prevent the Swedish Tax Agency from taking into consideration these Guidelines: the assignment is not circumscribed to OECD and other states, it is just explicitly mentioned that attention should be paid to these sources of information. Moreover, the Guidelines for APAs in the European Union are intended to be implemented in the domestic law of Member States. Therefore, even if the assignment does not include explicitly looking at the Guidelines for APAs in the European Union, they can be taken into consideration. Moreover, Swedish authorities proved being receptive to European suggestions in the field of transfer pricing: Swedish documentation requirements are considered fulfilled if done in accordance with the EUTPD approach25.

The decision of the Ministry of Finance encourages the Swedish Tax Agency to look at practice in other countries. The French system has some particularities that may be of interest.

See for example Christer Silfverberg, General IFA Report, Advance Rulings, CDFI 1999, Volume 84b, p. 573.

OECD Guidelines, 4.140 §. See also annex 3, Guidelines for conducting advance pricing arrangements under the mutual agreement procedure (”MAP APAs”).

OECD Guidelines, annex 3, Guidelines for conducting advance pricing arrangements under the mutual agreement procedure, 13 §: ”MAP APAs are governed by the mutual agreement procedure of the applicable double tax agreement, Article 25 of the OECD Model Tax Convention, and are administered at the discretion of the relevant tax administrations”.

Letter of mission for the budget of year 2007 concerning the Swedish Tax Agency and the Swedish Enforcement Authority (Regleringsbrev för budgetåret 2007 avseende Skatteverket och Kronofogdemyndigheten), 12 December 2006, Fi2006/4366 and Fi2006/6999 (partly), 4 §, p. 8. This could be translated in English as follows: ”The Swedish Tax Agency shall investigate the possibilities to enact a formalised procedure for requests of bi- and multilateral advance tax rulings in the field of transfer pricing (so-called Advance Pricing Agreements). This assignment includes closer examination of the experience in that field within the OECD as well as other countries’ rules. The need for legislation in order to enact such procedure in Sweden shall be assessed, and proposals for legislation shall be made. Advantages and drawbacks of different organisation models should be considered as well as expected costs for the suggestions made. The assignment shall be presented latest on 31 December 2007”.

See László Kovács: ”I now urge Member States to quickly implement in their legislation or administrative rules the recommendations included in the Guidelines”, press release IP/07/236.

Administrative guidelines, SKVFS 2007:1, 14 February 2007, 15 §: ”en dokumentation, som är upprättad enligt EUTPD, och som uppfyller samtliga där angivna villkor, anses upprättad enligt dessa föreskrifter”. This could be translated in English as follows: ”documentation prepared according to the EUTPD approach, and which fulfils its requirements, is considered prepared according to these guidelines”.

4 APAs in France

France is a country known for being tough on transfer pricing. The launch of an APA programme was a welcomed solution, and is now considered a success26. The idea here is to present the French APA programme and what is special about it as well as to discuss what might be interesting from a Swedish perspective, rather than a thorough and broad description of the French rules.

First, this article gives a general presentation of the French APA programme. Then, it brings to attention unilateral APAs and simplified APAs for SMEs. These are not explicitly included in the field of study defined by the Swedish Ministry of Finance, but may be worth considering as part of a comprehensive APA programme. Finally, some statistics show the rhythm of conclusion of APAs in France.

See Michel Collet, Bruno Gibert, France’s new transfer pricing environment: what you should know, Tax Notes International, 17 April 2006, p. 241. See also Bruno Gibert, Consolidating and developing the French advance pricing agreement procedure, European Taxation, February 2005, p. 57.

4.1 Presentation of APAs in France

4.1.1 Legal framework

French tax authorities implemented an APA programme through publishing administrative guidelines in 199927. These guidelines put into a frame the APA procedure: an agreement is signed by competent authorities of two or more states based on the article of the relevant tax treaty(ies) similar to article 25-3 of the OECD Model. The APA is then agreed upon by the requesting taxpayer.

An APA may therefore only be concluded with a country having signed with France a tax treaty including a MAP similar to the OECD Model. So does the tax treaty in force between Sweden and France28.

Although administrative guidelines were sufficient to provide for a legal frame at the domestic level, the lawmaker decided to codify the APA procedure. Codification was suggested in a report intended to improve the transparency and legal security of French tax law in order to increase attractiveness of France29. The report expressed the view that France should improve legal security, with the aim of attracting more foreign investments. One of the ways to achieve that was to codify the APA procedure after several years of experimentation, as the U.K. did30. The French lawmaker followed this recommendation: the rectifying Finance bill for 2004 included APAs in the law on rulings and gave them a legal basis31. Although the procedure remains the same, legal security is hence strengthened and shows willingness to increase manageability and certainty with regard to transfer pricing issues.

As in most countries with an APA programme, taxpayers do not pay a fee to the authorities when requesting an APA32 and the organisation is centralised: local tax authorities do not have jurisdiction to conduct APAs. The French authorities intend to differentiate APAs and tax audits: they try to conduct the APA procedure in a friendly and cooperative climate, in order to encourage the taxpayer to initiate an APA. An APA can be requested while the taxpayer is audited, and tax authorities can initiate an audit during the APA procedure. Yet the position they took in the APA can be used by the taxpayer, as with other advance tax rulings33.

Administrative guidelines (instruction administrative), 4 A-8-99, 7 September 1999.

Tax treaty concluded on 27 November 1990, in French. The unofficial English translation, available through the IBFD, states at article 25-3: ”The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They shall particularly consult together in order to endeavour to agree: (a) that the profits attributable to a permanent establishment in a Contracting State of an enterprise of the other Contracting State shall be attributed in the same manner in both Contracting States; (b) that the income derived by a resident of a Contracting State and an associated enterprise mentioned in Article 9 which is a resident of the other Contracting State shall be attributed in the same manner. They may also consult together for the elimination of double taxation in cases not provided for in the Convention”. The second sentence is not part of the OECD Model but does not forbid concluding an APA. Sentences one and three reproduce exactly the OECD Model: an APA could be concluded between Sweden and France.

Bruno Gibert, Améliorer la sécurité du droit fiscal pour renforcer l’attractivité du territoire.

Bruno Gibert, Améliorer la sécurité du droit fiscal pour renforcer l’attractivité du territoire, p. 35: U.K. codified the APA procedure through the 1998 Income and corporation taxes act and the 1999 Finance bill.

Section L. 80 B 7° of the Tax Procedures Code (Livre des procédures fiscales).

Contrary to the U.S. or Hungary, for instance.

Section L. 80 B 7° of the Tax Procedures Code.

4.1.2 Procedure and information to provide

French APAs are intended to follow the OECD Guidelines34. Their scope is broad, since no restriction exists as to industry, country (provided the relevant tax treaty includes an article similar to article 25-3 of the OECD Model), and size of the company. The procedure is divided into four stages: pre-filing and request, instruction, negotiation, and follow-up35.

To begin with, the taxpayer gets in touch with the department of the tax authorities that is dedicated to international tax issues (bureau CF336). During a meeting, the taxpayer presents its transfer pricing policy. The French authorities explain the request procedure and the conditions under which an APA could be concluded.

It is necessary to apply for an APA at the latest six months before the first financial year concerned by the APA37. Within two months after the APA request, the taxpayer shall inform the concerned foreign tax authorities of this request. French tax authorities are under no obligation to accept a request or to conclude an APA, and have no time limit either. Yet they usually answer quickly, within a month, and let know whether they accept conducting an APA process. The acceptance is discretionary: no appeal or other way to object for that decision is available to the taxpayer. But the important point is that French tax authorities generally reach an agreement when accepting to negotiate an APA38.

The administrative guidelines39 provide for an indicative list of documents and information that can be asked by the tax authorities when requesting an APA: legal structure, description of the transactions and their treatment, relevant financial data, currencies used in the group, previous APAs or rulings, duration of the financial year of each entity, financial accounting methods, justification and application of the transfer pricing method. The tax authorities can ask for other documents, even if they are deemed confidential by the taxpayer. All information transmitted is under secrecy and can only be disclosed to the foreign competent authority.

French taxpayers are used to providing such information, for example when preparing transfer pricing documentation, which limits the administrative burden of an APA procedure. The burden would also be reasonable in Sweden, since documentation has to be prepared anyhow. Use of information prepared for EUTPD is recommended as a basis for an APA request in the Guidelines for APAs in the European Union40.

An instruction phase follows acceptance of the request, where authorities and taxpayer meet to discuss the transfer pricing method. Such discussions can take place at the company’s premises, if it agrees to do so. Tax authorities can refuse the transfer pricing method suggested by the taxpayer, particularly when based on the berry ratio41. If the transfer pricing method is accepted at least partially, the French authorities issue a position paper. They inform their foreign counterpart(s) of this decision who also issue(s) a position paper. These position papers will serve as a basis for future negotiations. If negotiations are successful, the Bureau CF3 sends a letter to the taxpayer that describes the terms of the agreement, before signing it.

An annual report is annexed to the yearly tax return and a copy is sent to the Bureau CF3. The content of the report is decided in the APA, and can vary to a great extent depending on circumstances. In the absence of annual report, the APA is cancelled thirty days after an unanswered reminder.

The taxpayer shall make sure a transfer pricing documentation remains at the disposal of the tax authorities during the whole period covered by the APA.

Administrative guidelines, 4 A-8-99, 7 September 1999, p. 3.

See Jean-Luc Pierre, Richard Juan, Bastien Mallet, Panorama des redressements fiscaux: actualité, enjeux et prospectives, Revue Droit Fiscal, 2006, pp. 1937-1966. This article is about a conference dated 22 June 2006, where the French tax authorities presented recent trends in tax audits and international taxation.

Bureau CF3, 64-70 allée de Bercy, Télédoc 872, 75012 Paris, France. Tel: +33.1.53.18.05.20, fax: +33.1.53.18.05.87. The bureau CF3 is in charge of international tax issues. One division of this department is dedicated to the most complex tax issues (service des affaires particulières). Seven persons work on APAs in the service des affaires particulières, including an economist. The bureau CF3 is in contact with tax specialists of twelve countries through the embassy network: Belgium, Luxembourg, Netherlands, Germany, Italy, Spain, Portugal, U.K., Ireland, U.S., Canada, and Mexico. Most of the APAs are concluded with these countries. Staff working at the bureau CF3 is also involved in MAPs. This could be problematic if a taxpayer applies for an APA while its case is under a MAP.

The APA can start exceptionally from the financial year during which it was requested, if the taxpayer asks for this exception at the beginning of the procedure.

Michel Collet, Bruno Gibert, France’s new transfer pricing environment: what you should know, Tax Notes International, 17 April 2006, p. 247. See also Bruno Gibert, Améliorer la sécurité du droit fiscal pour renforcer l’attractivité du territoire, p. 35, footnote 70: up till September 2004, only two of thirty requests were refused.

Administrative guidelines, 4 A-8-99, 7 September 1999, annex, pp. 9-10.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007, annex, 18 §, p.11.

”The Berry ratio is the ratio of a business’ gross income to operating costs”, International Tax Glossary, IBFD, Fifth edition, 2005, p. 40.

4.1.3 Consequences of the agreement

An APA concluded by the French tax authorities has duration between three and five years, and guarantees there will be no tax audit on transfer prices if they are set up according to the method agreed upon in the APA. The agreement can be void only if the taxpayer gave false information in the request or if the conditions of the agreement are not fulfilled: the administrative guidelines explicitly mention that the APA is binding as long as the involved enterprises stick to it42.

Although the administrative guidelines exclude retroactive APAs43 (roll-backs), it happened in practice44.

So far, French tax authorities proved cooperative, pragmatic, and business oriented; this plays a big role in the success of the APA programme45.

Administrative guidelines, 4 A-8-99, 7 September 1999, p. 3: ”Il revêt la forme d’un accord entre deux administrations fiscales dont les effets sont subordonnés à l’adhésion des entreprises concernées”. This can be translated in English as follows: ”It takes the form of an agreement between two tax administrations. Its effects are dependent on whether the involved enterprises stick to it”.

Administrative guidelines, 4 A-8-99, 7 September 1999, p. 7: ”l’accord préalable ne peut avoir de portée rétroactive”. This can be translated in English as follows: ”the advance agreement cannot have retroactive scope”. As mentioned above, the APA can start exceptionally from the financial year during which it was requested, if the taxpayer asks for this exception at the beginning of the procedure.

Jean-Luc Pierre, Richard Juan, Bastien Mallet, Panorama des redressements fiscaux: actualité, enjeux et prospectives, Revue Droit Fiscal, 2006, p. 1964.

Michel Collet, Bruno Gibert, France’s new transfer pricing environment: what you should know, Tax Notes International, 17 April 2006, pp. 241-249.

4.2 Unilateral APAs

The rectifying Finance bill for 2004 extended the scope of APAs to unilateral agreements46. It was one of the measures adopted in late 2004 on recommendation of the report Améliorer la sécurité du droit fiscal pour renforcer l’attractivité du territoire.

It is often discussed whether unilateral APAs should be available or not. They are not recommended by the OECD47, and the European Union JTPF remains careful with regard to unilateral APAs48. Yet several countries implemented unilateral APAs, either when launching the programme (e.g. U.S., Spain, Netherlands), or after some practice of bilateral APAs (e.g. U.K.). Although the outcome of a unilateral APA brings less security to taxpayers than a bilateral agreement – as its scope is limited to the French tax administration and does not bind a foreign one – businesses seem to appreciate this solution to diminish transfer pricing risks. For example in the U.S., 42 APAs out of 82 concluded in 2006 were unilateral49. More than 90% of APA requests in Spain concern unilateral agreements50.

There are convincing arguments for and against unilateral APAs51. But when looking at the proportion of requests, forbidding such agreements may be a real frustration for taxpayers and hinder their internationalisation. Therefore the best solution seems to allow conclusion of unilateral APAs, but only in a limited number of cases and when a bilateral or multilateral APA is not possible or not suitable. This is what is preferred under OECD Guidelines52, Guidelines for APAs in the European Union53, as well as legislation in several countries (e.g. U.S., Netherlands, France).

The French lawmaker made possible the conclusion of unilateral APAs, and administrative guidelines provide information on how to conduct them54. These guidelines state that bilateral APAs are favoured55, and consider unilateral requests only in a limited number of cases: if no APA programme exists in the other state, if transactions are conducted with a great number of states, for simpler issues like management fees, or if the taxpayer is an SME.

From a legal point of view, a unilateral APA is not based on the MAP but on domestic law. It has the binding force of an advance tax ruling, which can be used by the French taxpayer against the tax authorities would they change their position.

Section L. 80 B 7° of the Tax Procedures Code.

OECD Guidelines, 4.130 § and 4.163 §.

Commission staff working document, Report prepared by the EU Joint Transfer Pricing Forum, 26 February 2007, SEC(2007) 246, 108 §, p. 28: ”Unilateral APAs reduce the risk of double taxation to some degree and can be used to effectively replace the domestic tax assessment. Although bilateral APAs are preferred over unilateral APAs, there may be circumstances where the taxpayer has good reasons to believe that a unilateral APA is more appropriate than a bilateral. (...) Care must be taken that unilateral APAs are consistent with the arm’s length principle in the same way as bilateral or multilateral APAs”. It should be noted that Germany ”does not consider unilateral APAs as best practice and, according to its domestic legislation, cannot conclude unilateral APAs”, Commission staff working document, Report prepared by the EU Joint Transfer Pricing Forum, 26 February 2007, SEC(2007) 246, p. 27, footnotes 4 and 5. On German APAs, see Jörg-Dietrich Kramer, German Advance Pricing Agreements, Tax Notes International, 22 January 2007, p. 257: ”a unilateral APA – that is, an APA without an agreement between the competent authorities of the states – does not make much sense”.

IRS Announcement 2007-31, 26 February 2007.

Bruno Gibert, Améliorer la sécurité du droit fiscal pour renforcer l’attractivité du territoire, p. 39.

The biggest drawback of unilateral APAs is that double taxation cannot be avoided with certainty, since only one tax administration agrees on the transfer pricing method. On the other hand, unilateral APAs are less time consuming and less expensive than bilateral or multilateral. They are also solutions when a bilateral or multilateral APA is too complicated to conclude, e.g. in case of too different legal systems, procedures, or cultures.

OECD Guidelines, 4.130 § and 4.163 §.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007, annex, 63-68 §, pp.16-17.

Administrative guidelines, 4 A-11-05, 24 June 2005.

Administrative guidelines, 4 A-11-05, 24 June 2005, p. 2:”Dès lors, l’administration privilégiera, chaque fois que cela est possible, la procédure bilatérale”. This can be translated in English as follows: ”Therefore, the administration will favour, each time it is possible, the bilateral procedure”.

4.3 Simplified procedure for SMEs

Access to APAs for SMEs is a key issue for their international development. Because APAs are expensive, take long time, and demand a strong involvement from the taxpayer, bigger companies have proportionally better access to APAs thanks to their bigger structure and financial capacity. Furthermore, a heavy APA procedure is not necessarily needed for SMEs, because their transactions are often less complex than transactions of MNEs. Therefore, a simplified procedure was identified as important both in the OECD Guidelines56 and the Guidelines for APAs in the European Union57.

French authorities first extended requests for unilateral APAs to SMEs58, and later published new guidelines specifically intended to simplify the procedure for SMEs59. These guidelines refer to a guide posted on the website of the French tax authorities60 which explains transfer pricing with special emphasis on issues encountered by SMEs.

The simplified procedure is available for requests of unilateral or bilateral APAs. To benefit from the simplified APA procedure, an enterprise must qualify as an SME and meet the three following criteria61: first, it should be employing less than 250 people. Second, it should have an annual turnover inferior or equal to EUR 50 millions (taxes excluded) or total assets inferior or equal to EUR 43 millions. Finally, 25 % or more of the capital or the voting rights cannot be owned by enterprises not qualifying as SMEs according to the aforementioned requirements.

When a company meets these criteria, it is entitled to benefit from the simplified APA procedure. As with common APAs, the taxpayer starts the procedure by getting in touch with the bureau CF3. The documentation to provide is limited to the following elements: legal structure, list of transactions and prices, functional analysis, description and justification of the chosen transfer pricing method, tax returns of the foreign companies concerned. This last requirement is questionable: the French authorities do not have the right to demand communication of foreign tax returns, except under the information exchange procedure. Moreover, the French company may not have the possibility to get foreign tax returns and the regular APA procedure does not have this requirement.

The SME must show that transfer prices comply with the arm’s length principle. Tax authorities can actually help the taxpayer prepare the functional analysis as well as choose the transfer pricing method, and even carry out the benchmark analysis in the usual public databases62. This may sound interesting for SMEs regarding the cost of a benchmark study. However, one may wonder if the French authorities have sufficient resources to perform benchmarks in a timely manner in case of many APA requests. Further, is it really desirable to have so close cooperation between tax authorities and taxpayer What if one of the involved authorities questions the APA in the future What if the SME does not accept the benchmark made by the authorities Practical difficulties may tone down this attractive idea.

The annual follow-up is also lightened and should only include computation of transfer prices according to the APA and a report on possible substantial modification in the activity during the year that has gone by.

This procedure is an important step towards securing transfer pricing for small enterprises. It shows willingness to support globalisation of small companies and goes towards an equitable access to APAs, in accordance with the OECD Guidelines63. Yet, not all European Union Member States agree with the need of a simplified APA procedure for SMEs, arguing there should be no discrimination64. However, on the suggestion of the JTPF, the Commission stated that ”Tax administrations should use their experience of the problems faced by SMEs to facilitate access to APAs for SMEs where APAs are useful for dispute avoidance or resolution65”.

Now practice will tell if French SMEs actually use and benefit from this simplified procedure. If Swedish authorities consider implementing a simplified APA procedure for SMEs, perhaps it could be based on the same threshold as simplified documentation requirements66. The alternative of helping the company perform part of the work may not be obvious prima facie, since it raises practical difficulties.

OECD Guidelines, 4.164 §.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007, annex, 69 §, p. 17.

Administrative guidelines, 4 A-11-05, 24 June 2005, p. 3.

Administrative guidelines, 4 A-13-06, 28 November 2006.

Les Prix de Transfert, available (only in French at the moment) at the following address: http://www2.impots.gouv.fr/documentation/prix_transfert/index.htm. The guide gives a brief description on how to determine an arm’s length price, but is not binding. Through simplified examples, it may bring into focus that transfer pricing risks are not borne only by big companies, which is likely to improve legal security of SMEs which are often unaware of the obligation to comply with the arm’s length principle. See Michel Collet, Xavier Daluzeau, Tax authorities issue transfer pricing guide, Tax Notes International, 19 February 2007, pp. 644-648.

Administrative guidelines, 4 A-13-06, 28 November 2006, p. 2. These criteria come from article 44 septies of the Code général des impôts.

Administrative guidelines, 4 A-13-06, 28 November 2006, p. 2.

OECD Guidelines, 4.164 §.

Commission staff working document, Report prepared by the EU Joint Transfer Pricing Forum, 26 February 2007, SEC(2007) 246, 111 §, p. 29.

Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee, COM (2007)71, 26 February 2007, annex, 69 §, p. 19.

Administrative guidelines, SKVFS 2007:1, 14 February 2007, 10 §.

4.4 Statistics

Even before codification of the procedure, French authorities showed their willingness to enter into APAs. They have participated in the first European multilateral APA for the company Airbus67. Up to April 2006, two other multilateral APAs involved France for the companies Michelin and Euronext68.

Ten APAs were signed at the end of July 200469, twenty-two at the end of January 200670. Fifty-three APA requests were sent between 1 January 2003 and 31 May 2006, seventeen of which were renewals of existing agreements. Among these fifty-three requests, 42 % had been negotiated, 8 % were signed, and 50 % were under negotiation on 31 May 2006. More than 80 % of these APAs are bilateral, and more than 75 % are granted for a five-year period71.

The number of APAs under negotiation is increasing, and the possibility of requesting a unilateral APA as well as a simplified procedure for SMEs will probably boost requests. One may wonder if resources within the tax authorities are sufficient, especially regarding possible cooperation with taxpayers.

Airbus APA, See Tax Management Transfer Pricing, Volume 13 Number 16, 21 July 2004. The quadrilateral APA involved France, Spain, United Kingdom and Germany.

Michel Collet, Bruno Gibert, France’s new transfer pricing environment: what you should know, Tax Notes International, 17 April 2006, p. 247.

Bruno Gibert, Consolidating and developing the French advance pricing agreement procedure, European Taxation, February 2005, p. 57.

Michel Collet, Bruno Gibert, France’s new transfer pricing environment: what you should know, Tax Notes International, 17 April 2006, p. 247.

Jean-Luc Pierre, Richard Juan, Bastien Mallet, Panorama des redressements fiscaux: actualité, enjeux et prospectives, Revue Droit Fiscal, 2006, p.1964.

5 Conclusion

The French APA programme could provide for some examples of implementation of solutions in the Swedish discussion, particularly as to unilateral APAs and simplified procedure for SMEs. The increase of APA requests in France shows that the business community is satisfied with this solution to secure transfer pricing. Satisfaction may however not be as high in Sweden: APAs are, in France, good solutions to enhance safety in the transfer pricing environment probably because of the tough climate in which transfer pricing tax audits are usually conducted (France is considered very aggressive among European countries in respect of transfer pricing72). This is why French authorities insist on distinguishing APAs from tax audits, and want to promote APAs as ways to avoid tax audits73. Yet regarding the boost of requests, resources may lack in order to conduct APAs in the most efficient way.

The overall advantages of an APA programme, as mentions the European Commission, overweigh the drawbacks. The Guidelines for APAs within the European Union came with good timing and provide for a frame that could help design a Swedish APA programme.

Jérôme Monsenego, PhD-candidate, Centre for Tax Law, Stockholm School of Economics, and tax lawyer at Öhrlings PricewaterhouseCoopers AB. Centre for Tax Law at the Stockholm School of Economics is supported by Skeppsbron Skatt AB, Deloitte Sweden, Öhrlings PricewaterhouseCoopers AB, and Mannheimer Swartling AB.

Tax Management Transfer Pricing, Volume 14 Number 16, 7 December 2005, p. 643.

Guide Les Prix de Transfert, p. 40: ”Afin de résoudre préventivement toute difficulté rencontrée et de se sécuriser totalement, les entreprises peuvent également solliciter un accord préalable en matière de prix de transfert”. This can be translated in English as follows: ”In order to solve in advance any difficulty encountered and to get total security, businesses can also request an APA”.